AUDIT EVIDENCE

Henry Ababio – UNIT TWO

Why does the auditor need evidence?

Evidence forms the basis of the auditor’s

judgement and thus, conclusion.
Documented evidence serves as a proof of the
nature and extent of work undertaken by the
auditor.
Sufficient appropriate audit evidence

ISA 500 Audit Evidence describes the overall objective of an

auditor in gathering evidence.
"The objective of the auditor is to design and perform audit
procedures in such a way to enable the auditor to obtain sufficient
appropriate audit evidence to be able to draw reasonable
conclusions on which to base the auditor's opinion.’
Sufficiency relates to the quantity of evidence.
Appropriateness relates to the quality and reliability of evidence
 Extract from the International Standard
(ISA 500)
‘The objective of the auditor is to design and perform audit
procedures in such a way as to enable the auditor obtain
sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the auditor’s
opinion.’
We can infer TWO main facts from this extract :
evidence has to be ‘sufficient’ and ‘appropriate’
appropriateness is a measure of its quality, its fitness for
purpose.
Let’s Look at Assertions Before Proceeding
to How Auditors Gather Evidence
Assertions:
• Directors produce, or cause to be produced, the financial statements.
In doing so, they are asserting that:
• -INDIVIDUAL ITEMS are :
correctly stated
properly classified
show figures that are arithmetically correct, or fairly estimated.
• THE ACCOUNTS, as a whole show , a true and fair view.
ASSERTONS CONTINUED
Clearly associated with the production of the financial
statements is series of assumptions which are defined in ISA
315 ‘ identifying and assessing risks of material misstatement
through understanding the entity and its environment’ as
assertions.
These are similar, in principle, to the fundamental
accounting concepts which also underline accounts
preparation, such as historical cost convention, the prudence
concept, etc which students learn when they first start
studying accounting.
 The meaning of Assertions according to
ISA 315
• The assertions in ISA 315 are series of statements which deal with the
underlying bases on which the financial statements are prepared and
deal with the measurement, presentation and disclosure of the various
elements of financial statements and related disclosures.
• ISA 315 splits the assertions into three categories, as follows:
Assertions about classes of transactions and events for the period
under review (TrEve)
Assertions about account balances at the period end, and (AcB)
Assertions about presentation and disclosure (PreDis)
Interrelations Between Tests Performed on
Transactions and Account balances
Transactions include sales, purchases, and wages paid during
the accounting period.
 Account balances include all the asset, liabilities and equity
interests included in the statement of financial position at the
period end.
Hence, there is a link between the two because if the auditor
performs tests to confirm the occurrence of sales this will also
provide some assurance about the existence of receivables,
although the auditor may perform other tests specifically
focussed on existence.
The assertions listed in ISA 315 (Revised 2019)
are as follows:
Assertions about classes of transactions and events and related disclosures for
the period under audit -O C A C Cla Pre
Occurrence – the transactions and events that have been recorded or disclosed
have occurred, and such transactions and events pertain to the entity.TE
Completeness – all transactions and events that should have been recorded
have been recorded, and all related disclosures that should have been included
in the financial statements have been included. TED
 Accuracy – amounts and other data relating to recorded transactions and
events have been recorded appropriately, and related disclosures have been
appropriately measured and described.Amt &data TE
Assertions about classes of transactions and events and related
disclosures for the period under audit –’OCACuClaP’ continued

Cut–off – transactions and events have been recorded in the correct

accounting period. TE
 Classification – transactions and events have been recorded in the proper
accounts.TE
Presentation – transactions and events are appropriately aggregated or
disaggregated and clearly described, and related disclosures are relevant and
understandable in the context of the requirements of the applicable financial
reporting framework.
Assertions about account balances and related
disclosures at the period end

ERO CA C P

Existence – assets, liabilities and equity interests exist.

 Rights and obligations – the entity holds or controls the rights to assets, and
liabilities are the obligations of the entity.
Completeness – all assets, liabilities and equity interests that should have
been recorded have been recorded, and all related disclosures that should
have been included in the financial statements have been included.ALE
Assertions about account balances and related disclosures at the
period end Con’td

Accuracy, valuation and allocation – assets, liabilities and equity

interests have been included in the financial statements at appropriate
amounts and any resulting valuation or allocation adjustments have been
appropriately recorded, and related disclosures have been appropriately
measured and described.
Classification – assets, liabilities and equity interests have been recorded
in the proper accounts.
Presentation – assets, liabilities and equity interests are appropriately
aggregated or disaggregated and clearly described, and related disclosures
are relevant and understandable in the context of the requirements of the
applicable financial reporting framework.
 Assertions Presentation and disclosures for
the period under audit –’ACORU’
The following five items are classified as assertions related to the
presentation of information within the financial statements, as well as the
accompanying disclosures:
Accuracy -the assertion is that all information disclosed is in the correct
amounts, and which reflect their proper values.
Completeness -the assertion is that all transactions that should be disclosed
have been disclosed.
Occurrence -the assertion is that disclosed transactions have indeed
occurred.
Assertions Presentation and disclosures for
the period under audit -ACORnOU
Rights and obligations -the assertion is that disclosed rights and
obligations actually relate to the reporting entity.
Understandability -the assertion is that the information included in
the financial statements has been appropriately presented and is clearly
understandable.
 Assertions - Interim and final audit procedures

During the interim audit, the system of internal control is documented and
evaluated. This will determine the mix of tests of control and substantive
procedures but both will tend to focus on transactions that have occurred so
far in the period.

During the final audit, the focus is on the financial statements and the
assertions about assets, liabilities and equity interests. At this stage the
auditor will design substantive procedures to ensure that assurance has been
gained over all relevant assertions.
Sufficient evidence

What is ‘enough’ evidence is based on the professional judgement of

the auditor.
However, in considering if he/she has ‘enough’ evidence on file, the
auditor must consider the following factors:
the risk of material misstatement;
the materiality of the item;
the nature of accounting and internal control systems;
Factors to take into account by the Auditor
–when considering ‘Sufficient evidence’
the auditor's knowledge and experience of the business;
the results of controls tests;
the size of a population being tested;
the size of the sample selected to test; and
the reliability of the evidence obtained.
Sufficient evidence – Example Audit of a
bank balance
Consider, for example, the audit of a bank balance:
Auditors will confirm year-end bank balances directly
with the bank. This is a good source of evidence but on
its own is not sufficient to give assurance regarding
the completeness and final valuation of bank and cash
amounts.
Sufficient evidence – Example Audit of a
bank balance continued
The key reason is timing differences. The client may
have received cash amounts or cheques before the end
of the year, or may have paid out cheques before the
end of the year, that have not yet cleared the bank
account. For this reason the auditor should also perform
a bank reconciliation.
In combination, these two pieces of evidence will be
sufficient to give assurance over the bank balances.
Appropriate evidence

Appropriateness of evidence breaks down into two important concepts:

reliability; and
relevance.

Reliability
Auditors should always attempt to obtain evidence from the most trustworthy
and dependable source possible. Evidence is considered more reliable when
it is:
obtained from an independent external source;
 The relevance and reliability of audit evidence

• The relevance and reliability of audit evidence

• Relevant evidence will be evidence that relates directly to the

assertion being tested – if it doesn’t then why is it being used?
• Reliable evidence is evidence which the auditor can have faith is
trustworthy.
• ISA 500 sets out types of evidence which are more reliable than
others:
Evidence that is More Reliable

Better when from independent, external sources –bank letters,

receivable circularisation etc.

Better when generated internally but the related controls are effective

Better when obtained directly by the auditor – compliance tests of

controls , substantive tests of transactions and balances

Better when in paper or electronic form rather than just spoken

Better with original documents than photocopies

 Evidence that is Less Reliable
Less Reliable

Evidence generated internally to the entity- Letter of director

representation, replies to ICQ questions etc.
Internal evidence not subject to strong controls
Indirect or inferred evidence
Oral
Photocopies, faxes etc.
Reliability continued
 the more reliable the evidence the less of it the auditor
will need.
However, evidence that is unreliable cannot be
appropriate as evidence; as no matter the amount or size
of it ,it still remains unreliable !
Audit Procedures to obtain evidence/ Basic
techniques for collecting evidence
Choose audit procedures from ‘AEIOU’

A: Analytical procedures

E: Enquiry and confirmation directly from a third party – ie inquiry

I: Inspection of records and assets

O: Observation

U: recalcUlation and reperformance

 Audit Procedures to obtain evidence
Procedure Meaning Control Substantive test

Analytical Procedures Exploring relationships Comparing yearly gross

between data margins

Enquiry and Getting confirmation from a Replies from a debtors

confirmation 3rd party
circular
Inspection or Examining records Signature as evidence Getting title deeds to a
Examination of property
original records
 Audit Procedures to obtain evidence
Procedure Meaning Control Substantive test

Observation Looking at a process Watching staff

complete their
attendance sheet

Re-calculation Checking Adding individual sales

mathematical accuracy in the sdb to check the
totals
 Review Questions
Qn. 1. ISA 500 Audit Evidence requires audit evidence to be reliable.

Required: List FOUR factors that influence the reliability of audit evidence. (4 marks)
Qn. 2 Explain FOUR financial statement assertions relevant to account balances at the
period end. (4 marks)
Q3. ISA 500 Audit Evidence requires auditors to obtain sufficient and appropriate audit
evidence. Appropriateness is a measure of the quality of audit evidence; that is, its relevance
and its reliability.

• Required: Identify and explain THREE factors which influence the reliability of audit
evidence. (3 marks)